University building plans hit budget wall

Events like the ceremonial ground breaking held Tuesday for an $18.6 million high-tech research building at the University of Kentucky will likely become rare at state universities over the next two years.

Gloomy state budget forecasts for the next biennium mean the legislature won't be able to approve many, if any, new public construction projects without potentially putting Kentucky's credit rating at risk.

So leaders at the state's eight public universities and community college system are bracing for rejection as they present wish lists full of large construction projects to lawmakers in coming months.

At the very least, they might have to rely on alternative funding schemes, such as the way UK is using $9.3 million in private donations and $9.3 in matching state Bucks for Brains dollars to pay for the Davis Marksbury Building for engineering research.

"It allows us to do something at a time when there are not many ground breakings going on in Kentucky," UK President Lee T. Todd Jr. said Tuesday in a parking lot off Rose Street, where the new research building will stand.

The Marksbury building — the namesake of its chief benefactor, the president and CEO of Exstream Software and a 1980 UK alumnus — is the first university project funded through private donations and Bucks for Brains, which is state funding aimed at boosting research.

Todd said UK has set aside some existing Bucks for Brains dollars for more construction, such as expansion of research space in the yet-to-be opened pharmacy school building.

That type of financing would work for buildings in the $20 million price range but not for the project that tops UK's wish list for state approval: a $206 million science research building.

That project is ranked 6th on the state universities' collective priority list, which the Council on Postsecondary Education will give Gov. Steve Beshear and the General Assembly in November. The $1.9 billion list of 52 projects includes research labs, student centers, classroom buildings, medical centers and major infrastructure upgrades.

Normally, the General Assembly would authorize the sale of bonds to pay for many of those projects, which are then paid back over 20 years. The annual debt payment on UK's research building would be $22.4 million, for instance.

But when lawmakers convene in January to fashion a budget for 2011 and '12, they won't likely have the ability to borrow as usual.

Last month, legislative staff economist Kristi Culpepper presented a report to the Capital Planning Advisory Board showing that, without new revenue, the state couldn't sell bonds for big-ticket items without running afoul of an important debt threshold.

Lawmakers have tried to spend less than 6 percent of the state's total revenue on bond debt payments. But with revenue shrinking amid the brutal economy, the amount of debt service in 2012 is expected to reach 6.7 percent — even without any new projects, according to Culpepper's report.

While the 6 percent benchmark isn't mandated by law, Wall Street agencies could lower the state's credit rating if lawmakers approve too much debt. That would raise interest rates on what Kentucky borrows, making everything more costly.

Still, much is left to state leaders' discretion.

"The legislature and the governor, in their wisdom, could choose to exceed the benchmark if they want to," said Kentucky Council on Postsecondary Education President Robert L. King, a former lawmaker and budget director in New York, as he tried to reassure university presidents and education leaders during a council meeting last week.

Mary Lassiter, the state budget director, said no decisions have been made about whether to recommend new projects. And the state funding picture for the next two years won't begin to come into focus until after the Oct. 12 meeting of the Consensus Forecasting Group, Kentucky's brain trust of economists.

Earlier this year, Beshear and the General Assembly approved $200 million in budget cuts — although they left universities alone — and used about $740 million in federal stimulus funds to plug the nearly $1 billion gap between what state leaders originally planned to spend in 2010 and the estimated $8.3 billion in expected revenue.

The Consensus Forecasting Group's most recent estimate says state revenue isn't expected to get back to the $9 billion range until fiscal year 2013.

That means lawmakers will face tough decisions when they return to Frankfort in January about funding all sorts of programs, including Bucks for Brains, which has been on the chopping block in the past.

"I will certainly be talking to the governor and the legislature about allowing us to have another round of Bucks for Brains with a portion being dedicated to things like this," Todd said after the Marksbury building ground-breaking. "I think this is a great way to leverage their money."